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TAX CLINIC

beginning in 2022; see Sec. 448(c) and Interest expense limitation for 2022
Rev. Proc. 2021-45).
Other exceptions exist, too. Performing EBIDA $1,500,000
services as an employee, as well as engag-
Interest expense (3,000,000)
ing in trades or businesses furnishing or
selling utilities, is not considered a trade Depreciation expense (1,000,000)
or business for purposes of Sec. 163(j). An
Taxable income (pre-limitation): ($2,500,000)
electing real property trade or business
(as described in Sec. 469(c)(7)(C)) and
Business interest expense 3,000,000
an electing farming business (as defined
ATI 500,000
in Sec. 263A(e)(4) or 199A(g)) are not
considered to be a trade or business for
purposes of Sec. 163(j). Making these Business interest expense limitation (30% of ATI) 150,000
specific elections requires the use of the
alternative depreciation system (ADS) to EBIDA 1,500,000
depreciate nonresidential real property, Interest expense (limited) (150,000)
residential rental property, qualified im-
Depreciation expense (1,000,000)
provement property, and property used
in a farming business with a recovery Taxable income $ 350,000
period of 10 years or more. Once made,
Federal income tax at 21% $ 73,500
the election is irrevocable.
Computing the deductibility limit
The starting point for computing the Interest expense limitation for 2021
limitation on the business interest
deduction is determining ATI. ATI
EBIDA $1,500,000
is taxable income computed without
regard to (1) any item of income, gain, Interest expense (3,000,000)
loss, or deduction that is not allocable Depreciation expense (1,000,000)
to a trade or business; (2) any business
Taxable income (pre-limitation): ($2,500,000)
interest or business interest income; (3)
the amount of any net operating loss
Business interest expense 3,000,000
deduction under Sec. 172; and (4) the
amount of any deduction allowed under Depreciation expense 1,000,000
Sec. 199A.
ATI 1,500,000
For tax years beginning prior to Jan.
1, 2022, ATI was also computed with-
Business interest expense limitation (30% of ATI) 450,000
out regard to any deduction allowable
for depreciation, amortization, or deple-
EBIDA 1,500,000
tion. That is, these items were added
back in calculating ATI. This add-back Interest expense (limited) (450,000)
rule no longer applies for tax years start- Depreciation expense (1,000,000)
ing after 2021 (Sec. 163(j)(8)(A)(v)).
Taxable income $ 50,000
The rule’s expiration could significantly
reduce the interest expense deduction Federal income tax at 21% $ 10,500
limit for highly leveraged businesses.
To illustrate the potential effect
of this change, the following example
compares a company’s interest limita- Example: Company X, a C corporation, ending Dec. 31, 2022. The company
tion before and after the recent modifi- has average annual gross receipts of $60 has no business interest income or
cation to the ATI calculation. million over the three-year tax period floor plan financing during the year. Its

12 December 2022 The Tax Adviser